EUR/USD Price Forecast: A test of 1.1000 looks premature

• EUR/USD rose further and tested levels near the 1.0800 barrier.
• The US Dollar came under extra pressure and dropped to fresh lows. 
• The ECB is widely expected to reduce its interest rates by 25 bps.

Wednesday saw EUR/USD continue its impressive rebound, reaching the vicinity of 1.0800 to hit multi-month peaks, while at the same time leaving behind the critical 200-day SMA.

Boosting the single currency emerged an improvement in Europe's growth outlook following Germany's announcement of a €500 billion infrastructure fund, seen as a potential buffer against global trade tensions. The late Tuesday announcement by the parties vying to form Germany's next government confirmed plans for the ambitious fund and an overhaul of borrowing rules, further boosting market sentiment.

In addition, the sharp uptick in spot also came in response to the continuation of the strong retracement in the US Dollar (USD) as investors’ concerns over the United States (US) economy remained unabated, while the tariff narrative was unchanged. Against that, the Dollar Index (DXY) slipped below 105.00, a level last seen in early November 2024.

Tariffs, geopolitics and market sentiment 

Earlier in the week marked the start of President Donald Trump’s 25% tariffs on imports from Canada and Mexico, along with 20% tariffs on Chinese goods. In turn, Beijing retaliated by placing more tariffs on US imports, and Canada followed suit with 25% duties on American products.

Such tariffs can affect currencies in a couple of key ways: 

1. Fueling inflation: If prices go up, the Federal Reserve (Fed) may keep monetary policy tighter, which often lifts the USD. 

2. Slowing growth: If higher tariffs hurt economic activity, the Fed might turn more dovish, weighing on the USD.

For Europe, any move by the US to impose tariffs on European Union (EU) goods could pull the Euro lower and pressure EUR/USD.

On a brighter note, geopolitics offered a dash of hope. Reports of a potential peace deal in the Russia-Ukraine war improved market sentiment—especially welcome after last week’s tense (and reportedly disastrous) meeting between President Trump and President Zelenskyy at the White House.

Central banks under the microscope 

In its latest meeting, the Fed kept rates at 4.25%–4.50%. Fed Chair Jerome Powell underscored solid US growth, stable inflation, and a robust labour market, insisting it’s still too soon to talk about rate cuts. Officials also remain wary of trade disputes pushing up consumer prices and complicating inflation management.

Meanwhile, the European Central Bank (ECB) is largely anticipated to trim its main interest rate by 25 basis points on Thursday to help the sluggish eurozone economy. In her latest press conference, ECB President Christine Lagarde has ruled out a bigger 50-point cut for now, saying she wants to see more data. She remains optimistic that inflation can reach the ECB’s target by 2025, indicating any future easing would be gradual.

Key levels and indicators 

EUR/USD is comfortably above 1.0700, fresh yearly peaks.

Next on the upside comes 1.0788 (the 2025 top from March 5). A break above that points to 1.0817 (78.6% Fibonacci retracement), and then 1.0936 (November 2024 peak). 

On the flip side, there is interim support at the 55-day SMA at 1.0401, ahead of 1.0359 (February 28 low). Below that, 1.0282 (February 10 low) and 1.0209 (February 3 low) are in focus. A deeper pullback could aim for 1.0176 (2025 bottom from January 13).

Momentum signals point to some improvement. The RSI entered the overbought zone just above 70, hinting at further bullish momentum, and the ADX rose to around 16, suggesting some strengthening of the overall trend.

EUR/USD 4-hour chart

Short-term 0utlook 

EUR/USD’s path forward hinges on shifting trade policies, contrasting central bank moves, eurozone growth struggles, and Germany’s political and economic climate.